Dow is closing in on a key inflection point

Thomas H. Kee Jr. is the president and CEO of
Stock Traders Daily (dotcom), where he offers strategies and newsletters to
both institutional and individual investors, and he manages money privately for
both institutional and individual investors through Equity Logic LLC. A
specialist in technical analysis, Kee is also the founder of one of the leading,
longer-term fundamental economic and stock market indicators in history, The
Investment Rate. This proprietary tool, which is available to clients, too,
predicts major economic cycles well in advance, and has been accurate since
1900. Using his broader observations of the economy to define disciplines, Kee
has been able to accurately predict market cycles in advance using his
multi-tiered technical indicators, and that combination has kept him ahead of
the curve since starting Stock Traders Daily in January 2000.

A week ago, I wrote a column that talked about my conditionally positive bias based on the test of longer-term support levels that happened in the market in prior weeks. Our Strategic Plan strategy is holding ProShares Ultra Dow30
DDM, +1.46%
for example, and I alluded to risk controls that we incorporate into this strategy, but I did not go into detail about them. Given what has transpired this week so far, I believe it is important to do so now.

First of all, our swing-trading strategy, which was double long the Nasdaq from last week using the ProShares Ultra QQQ ETF
QLD, +1.56%
sold that position and reverted to cash on Tuesday. There is a material difference between this swing-trading strategy and our Strategic Plan strategy, however, in that the swing-trading strategy has a much shorter duration. Where our Strategic Plan might hold a position for a few months, our swing-trading strategy averages a few days. Also, The swing-trading strategy is governed by shorter-term durational chart patterns, whereas the longer-term Strategic Plan strategy, uses longer-term chart patterns exclusively.

It is these that I want to discuss because these longer-term chart patterns are what provide us with a risk controls I alluded to.

Our entry levels for the Strategic Plan strategy’s current position are much lower than where DDM is today, and that is because the support line of the upward-sloping trend line in the longer-term chart patterns demonstrated below were tested when the market was much lower as well.

Dow 1 year

However, the aggressively upward-sloping channel defined by the green trendline and the parallel resistance line in our longer-term chart pattern of the Dow Jones Industrial Average, for example, increases every day. That means that support levels increase every single day, and over time, support levels will be much higher than they were in the past.

To be specific, the entry levels in our Strategic Plan strategy happened somewhere near 17,600 in the Dow when that support line began to be tested at the end of March. Over time that level has increased and now the support line exists at 17,900.

The reason I am offering this updated article is to reveal that risk control.

Although our position was established at lower levels, we absolutely will sell it if our support line breaks. We have adjusted our profit stop to reflect what price would be if that support level breaks, and if we are stopped out, we therefore are likely to secure a small gain from our position because of the higher levels that we have witnessed, but in addition to that, we may, by rule, also engage the short side of this market using the inverse ProShares UltraShort Dow30 ETF
DXD, -1.59%
if the rules are satisfied.

On Tuesday, the Dow came very close to this level, so I felt it was important for me to update my risk controls based on the column I offered last week. I might add that the Russell 2000 looked extremely ugly on Monday, and because it has been such a leader until recently, the weakness in the Russell 2000 should be duly noted.

The Strategic Plan strategy, at the time I wrote this, was still long the Dow because support lines were still holding, but if they break, that can change. Obviously, I won’t reveal all of these details every time a trade is made, as this format isn’t an efficient means of doing so, but you can clearly see from the graph I have provided that if the support line breaks, there will be substantial opportunity on the downside as well. The ability or the inability of the market to hold support is the key. Thus far support is holding, but it is our inflection level and will continue to be.

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